Last week, I provided a very general definition of a limited partnership. This week, I’ll do the same for trust.
While we think of a trust as an entity, it’s really a series of relationships between the following individuals:
The “grantor” contributes assets (usually money) to the trust
The “trustee” holds the legal title to the assets, but must manage them for the “beneficiaries,” who have an equitable interest in the property. This split in ownership interests is one of the most unique aspects of the common law; for those in civil law jurisdictions, the idea that two people can have an ownership in property is very odd.
The “trust instrument” is written by the grantor. It provides the rules for the trustee, essentially telling his how to carry out his duties. The underlying concept is similar to a partnership agreement.
Here’s a basic example. A father places $100,000 into a trust which is managed by his bank’s trust department. He establishes the trust to pay educational expenses for this children. His lawyer writes a trust instrument that outlines the trust purposes, distribution scheme, investment policy and trustee’s duties and obligations.
This is a very general, 30,000 foot view. Trusts, like partnerships, are very complex concepts (you can learn a bit more here). Next week, we’ll dive into the differences between these two entities.
Last week, we began a series explaining why an individual should place his trading and/or investment account into some type of entity. Trusts and family limited partnerships (herein called “FLPs”) are the most often used entities. This post will provide a very general definition of a limited liability partnership.
Texas law (and most other jurisdictions) defines a partnership as, “an association of two or more persons to carry on a business for profit as owners.” This definition contains several key words:
General partners (GPs) run the day to day partnership operations while limited partners (LPs) simply benefit from the GP’s management. Perhaps the best way to think about this structure is GPs act as company executives while LPs are stockholders. There is also one more key difference: GPs are jointly and severally liable for partnership debts while LPs aren’t (unless they are also GPs). Here is the relevant statutory language:
Sec.152.304. NATURE OF PARTNER ’S LIABILITY. (a) Except as provided by Subsection (b) or Section 152.801(a), all partners are jointly and severally liable for all obligations of the partnership unless otherwise:
(1) Agreed by the claimant; or
(2) As provided by law.
In contrast, this is the language for limited partners:
Sec. 153.102.LIABILITY TO THIRD PARTIES. (a) A limited partner is not liable for the obligations of a limited partnership unless:
(1)The limited partner is also a general partner; or
(2)In addition to the exercise of the limited partner’s rights and powers as a limited partner, the limited a partner participates in the control of the business.
This structure provides several key benefits:
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